Production, Manufacturing, Transportation and Logistics
Coordination mechanism, risk sharing, and risk aversion in a five-level textile supply chain under demand and supply uncertainty

https://doi.org/10.1016/j.ejor.2019.08.051Get rights and content

Highlights

  • We adopt five-level structure for realistic depiction of textile supply chain.

  • We design coordination mechanisms for both manufacturer and retailer led scenarios.

  • We propose risk-sharing approach to improve cotton firm's profit under severe loss.

  • We devise the joint pricing and quantity decision of apparel.

  • We propose coordination mechanism considering uncertainties at each level.

Abstract

The textile supply chain has attracted worldwide attention because of its high volatility in apparel and cotton production due to coordination issue and yield uncertainty. In this context, existing analytical works related to coordination are restricted to a dyadic apparel retailer–manufacturer setting under demand uncertainty for the conventional manufacturer-led scenario. Several issues, such as the holistic depiction of the textile supply chain, impact of cotton production uncertainty, coordination mechanism for the emerging retailer-led scenario, and profitability issue of cotton firms, have not been paid enough attention. We propose an analytical model for a textile supply chain by adopting a five-level structure that comprises an apparel retailer, apparel manufacturer, textile firm, fiber firm, and cotton firm under simultaneous demand and supply uncertainty using a wholesale price contract. The wholesale price contract fails to coordinate the supply chain. Next, we show how the buyback contract and option contract coordinate this supply chain under manufacturer-led and retailer-led scenarios, respectively. Additionally, we discuss the improvement of cotton firm's profitability using a risk-sharing mechanism between the cotton firm and the fiber firm for the high loss-making scenarios. Also, we demonstrate how the risk-averse attitude of both the apparel retailers and the cotton firms can lead to the unsold cotton inventory problem. As extensions, first, we devise joint pricing and order quantity decision of apparel. Finally, we consider production uncertainties for all middle-level members in our proposed model and devise a buyback bidirectional sales rebate penalty contract for coordination.

Introduction

In recent times, the textile supply chain has attracted worldwide attention because of its high volatility in apparel and cotton production. For the period 2015–2017, global apparel production decreased by approximately 5–6% (Economic Times, 2018). On the other hand, in recent times, technological changes, adverse climate, and regulatory changes have affected cotton production of various countries, including India in 2013 (Business Standard, 2013), and the USA in 2015 (Delta Farm Press, 2015), leading to a bleak growth scenario for the textile and apparel industries. Our in-depth analysis of this topic reveals that two important factors, namely, coordination and cotton yield uncertainty act as impediments to achieving the desired performance.

From inception, coordination remains a major problem in the textile supply chain. Here, high apparel demand uncertainty presents greater complexity to the issue, especially in the case of fashion apparel retailers. For instance, the H&M group incurred a $4.3 billion unsold inventory of clothes in 2017 due to rapidly changing customer preferences (New York Times, 2018). On the other hand, apparel retailers’ conservative strategies often lead to a scenario in which total customer demand cannot be satisfied. Additionally, changes in industry structure create a dilemma for devising the appropriate contract. Deviation from conventional manufacturer-led scenarios, where the manufacturer has more channel power than the retailer, and the emergence of several apparel retail giants, such as Nike, Ralph Lauren, Levi Strauss & Co, and others, signify the shift of channel power from apparel manufacturer to apparel retailer in many cases (Business Insider, 2015).

On the other hand, the uncertainties associated with cotton production affects the overall performance of the textile supply chain. The cotton firm often incurs a huge loss due to such production uncertainty along with fluctuation in price. Alternatively, the rising price of cotton leaves a negative impact on overall supply chain performance. In 2010, large retailers, such as Walmart and GAP, incurred substantial production costs because of increasing cotton prices (Bloomberg, 2010). Further, our investigation reveals that the risk attitude of the apparel retailer often plays a crucial role in supply chain performance. Often, high demand uncertainty related to fashion apparel makes apparel retailers more loss-averse and influences them to order less. In 2013, Marks & Spencer experienced decreasing profit level despite the rise of the sales in the overall market (BBC, 2013). Retail experts opined that the company's risk-averse strategy was solely responsible for this. Also, cotton firms’ risk attitude often leads to a change in the corresponding production planning.

Since the 2000s, there is a rising interest among researchers in understanding the textile supply chain. Our exploration reveals that most of the scholars focus on several topics such as pricing strategies (Sen & Zhang, 2009), design of coordination mechanism (Lee & Rhee, 2008), inventory management (Aydinliyim, Pangburn & Rabinovich, 2017), quick response strategy (Choi, Li & Yan, 2006), and risk management (Choi, 2018). Among these, devising coordination strategy has received significant attention from the scholars. In a similar line with Wen, Choi and Chung (2019), our analysis indicates that most of the research works focus on the interaction between apparel manufacturer and retailer. For this reason, several important issues, such as the impact of cotton production uncertainty on the supply chain coordination as well as on other supply chain members’ decisions, improvement of the cotton firm's profitability, and effect of the apparel retailer and cotton firm's risk attitude on their respective ordering and production planning decision, have not been paid enough attention. Also, most of the scholarly discussions related to coordination are restricted to the manufacturer-led scenario. In the context of emerging retailer-led scenario, designing an appropriate contract that ensures coordination becomes important.

The research avenues obtained from the existing literature of textile supply chain and the real-life instances mentioned above motivate us to present a realistic depiction of the textile supply chain and discuss the aforementioned problems along with their probable solutions. The contributions of this paper are as follows:

  • (i)

    In this paper, we design a typical five-level textile supply chain comprising a cotton firm, a fiber firm, a textile firm, an apparel manufacturer, and an apparel retailer under simultaneous demand and supply uncertainty. First, we apply a wholesale price contract to design the supply chain. Here, we derive the order quantity decision of the apparel retailer, the planned production quantity decision of the cotton firm, and the pricing decisions of the apparel manufacturer, the textile firm, the fiber firm, and the cotton firm. We conclude that the wholesale price contract fails to coordinate this supply chain.

  • (ii)

    Next, we show how the buyback contract and option contract can be applied to coordinate the five-level textile supply chain for the manufacturer-led scenario and retailer-led scenario, respectively. Then, we show how the profitability of the cotton firm can be improved using a special risk-sharing mechanism between the fiber firm and the cotton firm in the highly loss-making scenarios.

  • (iii)

    We further analyze the impact of risk attitude of the apparel retailer and the cotton firm by adopting a utility theory approach. Our analytical investigation concludes that the presence of both a risk-averse apparel retailer and a risk-averse cotton firm often leads to high levels of unsold cotton inventory, for instance; scenarios such as the USA in 2015.

  • (iv)

    We perform an extensive numerical analysis and draw insights on the profitability of the textile supply chain member under proposed contracts, the impact of cotton production uncertainty on the coordination, and the effect of risk aversion.

  • (v)

    As extensions to our work, we devise joint pricing and ordering decision of the apparel for the centralized textile supply chain and the apparel retailer in the decentralized setting. Also, we extend our work by designing the textile supply chain in the presence of production uncertainty at each level apart from the above-mentioned uncertainties. Here, we propose a buyback bidirectional sales rebate penalty (BSRP) contract for coordination.

The article is organized as follows. In Section 2, we present a literature review of related works. In Section 3, we demonstrate and derive the main results of the proposed model. Numerical results are presented in Section 4; in this section, we also discuss the insights obtained from proposed model. Extensions to our main model are demonstrated in Section 5. We conclude the paper in Section 6 and discuss future research avenues.

Section snippets

Literature review

Our work draws upon three streams of literature: coordination mechanism in the textile supply chain; coordination mechanism under demand and yield uncertainties; and risk sharing and risk aversion in the supply chain.

Design of the textile supply chain under demand and yield uncertainties

In this section, we present our proposed model describing design of five level textile supply chain, coordination mechanism, risk sharing to improve cotton firm's profitability, and impact of risk aversion. Before demonstrating the model, first, we present the notations related to the decision variables and parameters used in our model in Table 1 below.

Numerical results and managerial implications

In this section, we present the numerical results and the managerial insights of the study.

Extensions to the proposed model

In this section, first, we devise joint pricing and ordering decision of the apparel for the centralized textile supply chain and the apparel retailer in the decentralized setting. Also, we design the textile supply chain considering the production uncertainty at each level apart from the aforementioned uncertainties.

Conclusion

Recently, the world has experienced a high variation in apparel production due to coordination issues and cotton production uncertainty. Motivated by this problem, we represent the textile supply chain using a five-level supply chain structure under simultaneous demand and supply uncertainty. We show how supply uncertainty plays an instrumental role in ordering, production, and pricing decisions. We conclude that the wholesale price contract fails to coordinate the supply chain. Next, we

References (48)

  • M.A.A. Rahman et al.

    Supply chain models for an assembly system with preprocessing of raw materials

    European Journal of Operational Research

    (2007)
  • R.W. Seifert et al.

    A three-echelon supply chain with price-only contracts and sub-supply chain coordination

    International Journal of Production Economics

    (2012)
  • A. Şen et al.

    Style goods pricing with demand learning

    European Journal of Operational Research

    (2009)
  • WeiY. et al.

    Mean–variance analysis of supply chains under wholesale pricing and profit sharing schemes

    European Journal of Operational Research

    (2010)
  • WenX. et al.

    Fashion retail supply chain management: A review of operational models

    International Journal of Production Economics

    (2019)
  • ZhaoY. et al.

    Coordination of supply chains by option contracts: A cooperative game theory approach

    European Journal of Operational Research

    (2010)
  • H.V. Arani et al.

    A revenue-sharing option contract toward coordination of supply chains

    International Journal of Production Economics

    (2016)
  • D. Barnes-Schuster et al.

    Coordination and flexibility in supply contracts with options

    Manufacturing & Service Operations Management

    (2002)
  • BBC, (2013). Marks and Spencer profits fall as clothing disappoints. Retrieved...
  • Bloomberg, (2010). Gap, Wal-Mart clothing costs rise on ‘Terrifying’ cotton prices. Retrieved...
  • Bloomberg, (2014). Cotton glut eroding cost for gap jeans as china buys less. Retrieved...
  • Business insider, (2015). The 10 biggest apparel companies in the US. Retrieved...
  • Business Standard, (2013). Adverse weather impacts earlier cotton crop estimate. Retrieved...
  • CaoN. et al.

    How are supply chains coordinated? An empirical observation in textile-apparel businesses

    Journal of Fashion Marketing and Management: An International Journal

    (2008)
  • Cited by (73)

    • Climate change adaptation and disaster risk reduction in the garment industry supply chain network

      2023, Transportation Research Part E: Logistics and Transportation Review
    View all citing articles on Scopus
    View full text